Kimbell Royalty Partners, LP current report, 25 March 2019

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Business Context and Reporting Period

Company: Kimbell Royalty Partners, LP
Filing Type: Form 8-K (Current Report)
Date of Report: March 25, 2019
Event: Completion of the acquisition of equity interests in subsidiaries owned by PEP I Holdings, LLC, PEP II Holdings, LLC, and PEP III Holdings, LLC (collectively, the "Sellers").

Key Financial Metrics and Transaction Details

Transaction Consideration:

  • Equity Issuance: 9,400,000 Opco Common Units and an equal number of Class B Units issued to Sellers.
  • Cash Component: Sellers paid $0.05 per Class B Unit issued as additional consideration.
  • Escrow Adjustment: An amendment to the Securities Purchase Agreement adjusted the balance between cash and equity held in escrow pending the outcome of ongoing litigation involving certain acquired subsidiaries.
Operational Metrics (Post-Acquisition Estimates):
  • Production Increase: Approximately 1,600 barrels per day (oil-equivalent basis).
  • Active Rigs: 17 rigs on acquired acreage, bringing the total to 90 rigs actively drilling on Partnership acreage.
  • Acreage: Added approximately 12,200 net royalty acres, increasing total position by 9% to 144,100 net royalty acres.
  • Revenue Mix: Acquired assets derive roughly 77% of revenues from oil and natural gas liquids.
  • Geographic Mix: Over 64% of production is from the Eagle Ford Shale, Permian Basin, Haynesville Shale, and Powder River Basin.
  • Decline Rate: Estimated average five-year decline rate for proved developed producing reserves remains near 12%.
Financial Statements:

Financial statements of the acquired businesses and pro forma financial information are not included in this filing. They are scheduled to be filed within 71 calendar days after the required filing date of this 8-K.

Material Changes and Agreements

Amended and Restated Registration Rights Agreement (A&R RRA):

  • Entered into on March 25, 2019, consolidating prior agreements related to the Haymaker Acquisition and a December 2018 dropdown transaction.
  • Covers the resale of Common Units issued upon conversion of Opco Common Units and Class B Units.
  • Partnership agreed to file a Shelf Registration Statement within 30 days and use reasonable best efforts to make it effective within 120 days.
  • Liquidated damages apply if the Shelf Registration Statement is not effective by the 180th day.
  • Permits holders to request underwritten offerings if gross proceeds are reasonably expected to exceed $50 million.
Unregistered Sales of Equity:

The issuance of 9,400,000 Class B Units and Opco Common Units was conducted as a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933.

Outlook, Risks, and Contingencies

Management Commentary:

The acquisition is expected to increase production and acreage significantly while maintaining the current decline rate profile. The asset mix is heavily weighted toward oil and natural gas liquids in key shale basins.

Risks and Contingencies:

  • Litigation: A portion of the consideration is held in escrow pending the outcome of ongoing litigation involving certain acquired subsidiaries.
  • Reserve Estimates: Reserve engineering is subjective; final estimates by Ryder Scott Company, L.P. as of December 31, 2019, may differ from current management estimates.
  • Market Risks: Risks include low or declining oil and natural gas prices, availability of capital for drilling, and operational hazards (e.g., blowouts, pipe failure).
  • Integration: Risks related to the ability to realize anticipated benefits and integrate acquired assets.

Investor Verification Checklist

  • Escrow Status: Verify the specific terms and potential impact of the litigation holding a portion of the consideration in escrow.
  • Pro Forma Data: Await the filing of pro forma financial information (due within 71 days) to assess the full financial impact of the acquisition.
  • Reserve Audits: Monitor the upcoming reserve report by Ryder Scott Company, L.P. for potential revisions to the estimated 12% decline rate and production volumes.
  • Registration Timeline: Track the filing and effectiveness of the Shelf Registration Statement to ensure compliance with the 120-day and 180-day deadlines to avoid liquidated damages.
  • Asset Quality: Review the specific composition of the 12,200 net royalty acres and the 17 active rigs to validate the production increase estimates.